Our Corporate and Government Contracts attorneys often counsel contractors interested in acquiring an entity with a clearance or assets used on a classified contract. The clearance is a consideration in the transaction that cannot be overlooked. Indeed, the clearance is often one of the seller’s most important “assets.” Buyers and sellers alike should be aware of the National Industrial Security Program Operating Manual (“NISPOM”) requirements.

For instance, if the acquisition is a stock purchase and the buyer holds the acquired firm as a subsidiary, the NISPOM states that, as a general rule, the parent company must have a clearance at the same or higher level as the subsidiary. Therefore, if the buyer does not already have a clearance at the same or higher level as the acquired firm, then post-closing the buyer may need to obtain a clearance of its own or be excluded from access to classified information. The acquired firm also will need to notify the Defense Counterintelligence and Security Agency (“DCSA”) (formerly the Defense Security Service) of the change of ownership through the National Industrial Security System (formerly the Electronic Facility Clearance System).

If, however, the acquired firm is merged into the buyer or the acquisition is an asset purchase, including assets used to perform the classified contract(s), then the buyer—as the successor entity holding the cleared contracts—will need to obtain a clearance. It is important for the acquired firm to coordinate with DCSA, which may issue an interim clearance for the buyer and process the buyer’s clearance on an expedited basis in light of a pending transaction.

If your company is considering an acquisition involving cleared contracts, be sure your counsel understands the NISPOM requirements.

Megan Connor, a Partner at PilieroMazza, is a member of the Government Contracts Law and Small Business Programs & Advisory Services practice groups.

Kathryn Hickey, a Partner at PilieroMazza, is a member of the Business & Corporate Law and Cybersecurity & Data Privacy practice groups.